The purpose of this study is to examine how effective corporate governance can mitigate the negative effects of insider pledging. The paper focuses on several board characteristics that are associated with corporate governance: board size, the percentage of outsider and insider directors on the board and their experience.
The data are collected from Taiwan, an emerging market with a unique share-pledging disclosure regime. All data are collected from the Taiwan Economic Journal (TEJ) database, including share pledging information, firm performance and board characteristics. Regression analysis with moderation models was conducted to test the proposed hypotheses.
Board size negatively moderates the relationship between insider pledging and firm performance, suggesting that large boards are associated with weaker corporate governance. Outside and inside directors have opposing moderating effects: outside directors mitigate the negative impact of insider pledging, while inside directors are associated with an increased negative impact. In addition, outside directors’ experience, as measured by multiple board appointments, negatively moderates the relationship, confirming that busy directors are less effective in fulfilling their monitoring responsibilities.
The negative impact of insider pledging has attracted considerable research attention. By viewing insider pledging as a corporate governance issue, this paper provides evidence that firms with board characteristics associated with better corporate governance suffer less from the negative effects of insider pledging on firm performance. This research highlights the importance of the board of directors in managing the effects of insider pledging.
